The food industry, which is run primarily through small- and medium-scale enterprise, is seeking further discussions on the proposed Goods and Services Tax regime.
According to industry insiders, the proposed GST will not change the fate of MSMEs (micro, small and medium enterprises) as several of its provisions will play a spoilsport for their growth and hamper the ease of doing business as well as the Make in India campaign.
“GST proposals were worrisome,” said one industry representative while commenting on the proposals. He stated that although the GST was aimed at simplification of taxation system, the division into State GST and Centre GST would make things complicated.
He stated, “The change from Sales Tax to VAT (value-added tax) has increased the paperwork manifold. There needs to be clarity on the proposed GST regime.”
Meanwhile, industry representatives further raised concern on the silence on Excise Duty exemption under the GST for MSME sector. It was exempted to Rs 1.5 crore turnover which the industry wanted to be raised to Rs 5 crore.
The GST Promise
According to one discussion paper – right from inception, GST has been hailed as one of the game- changing reforms which aim to make India a single, seamless market. Implementation of a well-designed GST model that applies to the widest possible base at a low rate can provide significant growth stimulus to the business and contribute to the prime minister’s mission of “Make in India.”
The fundamental objectives of GST – remove the cascading impact of taxes, bring about transparency in compliance, and provide a boost to investments thereby enable a 1-2% increase in the economic growth of the country.
The discussion paper says, “In the currently tabled Constitutional Amendment Bill, there are certain areas that vitiate the principles of GST given above and could potentially hamper the ease of doing business in addition to increasing the costs for the business significantly, rendering the transition to GST highly inflationary for the country.”
Additional non-creditable 1% Tax on interstate supply of goods – Inflation risk, Impacts ease of doing business
Clause 18 of the Bill proposes an additional tax of one per cent on supply of goods in the course of inter-state trade or commerce which will be levied at source. The Bill provides the term of the additional tax as two years or such other period as the GST Council may recommend. The proposed levy of 1% additional tax by the Central government for the benefit of originating states is detrimental to the industry and defeats the objectives of GST.
The 1% additional tax retains the characteristics of origin-based CST levy thereby hampering the business efficiencies and free cross border movement of goods.
One of the promises of GST is to make India a common market and remove the cascading impact of taxes. The proposed additional tax levy not only distorts this promise but also results in cascading where goods move inter-state on account of multiple stock transfers to own depots, job-work, sales returns, etc. which are all business imperatives.
Any non-creditable tax levied in the origin state is inflationary.
Goods move inter-state several times in the production & distribution process
Industry rues that currently warehouses are located in different states because they are tax optimal. However warehouse location should be driven by the needs of the business and not taxation. GST should provide the industry an opportunity to plan the location of the warehouse which is not based on tax consideration but on logistics flow.
Goods move several times from one state to another during the production & distribution process. The goods are produced in various locations for reasons of availability of raw materials and manpower, and stored at common distribution centres for ease of distribution and marketing. The cumulative burden of 1% on interstate movements would far exceed the statutory rate of 1% and would be crippling.
“Therefore, the additional cost burden of the tax will be a direct hit for the domestic manufacturers making us economically unviable and will be against the spirit of ‘Make in India.’ It will apply to domestic manufacturers only and not to goods imported directly into the destination state – a serious competitive disadvantage to the domestic manufacturers,” says the industry.
The objective behind levying the 1% additional tax is to provide compensation to the states for any losses under the GST regime. However, the Constitutional Amendment Bill already contains a provision for compensating the states for any losses under GST for five years. Further, the states’ share of taxes has already been increased after the Bill has been tabled.
The industry’s recommended, given that any loss for the states is already compensated, and the fact that the 1% non-creditable tax flies in the face of what GST aims to achieve, the proposal to levy the additional tax should be altogether repealed.
Exclusion of Real Estate and petroleum from GST – Growth & Inflation risk
According to the industry, if real estate is excluded from the GST purview, it would mean that credit would not be available for the input used in construction of factories, offices, civil structures and even plant and machinery which may be considered a part of real property, being attached to land.
The real estate industry was included in the VAT net on introduction of VAT; excluding this from GST would be a step in the reverse direction. Exclusion of Real Estate and Petroleum (for the initial years) from the GST levy and continuing with the current taxation regime for these sectors will significantly increase the cost of doing business and drive inflation higher as these are key inputs for the businesses. Additionally, keeping them out would increase the compliance costs for the businesses due to multiple tax rules and complicate the overall tax regime in India resulting in administrative difficulties for both industry and governments.
Currently industries are using diesel for generating power required to operate the plant in the absence of adequate continuous power from the state grid. Furnace Oil and LPG are also used as an input in manufacture of certain products. In the absence of usage of any alternate source of energy in generating power or in the manufacture, exclusion of petroleum products in the initial phase of introduction of GST will cause financial hardship to the industry.
Moreover, the real estate sector is a significant contributor to the gross domestic product and a contributor to growth. It serves as a foundation for virtually all industrial and commercial activity. Hence excluding real estate from the scope of GST would result in a major erosion of the tax base, causing distortion and denying the full economic benefits of the GST structure envisaged originally. Internationally, in the modern VAT jurisdictions such as Australia, New Zealand, Canada and South Africa, land and property supplies are inseparable and indistinguishable from supplies of other goods and services and India should also follow suit, says the industry.
Recommendation: Commercial real estate and petroleum should be brought under the GST umbrella.
Subsume additional taxes / cesses in the GST (Research & Development Cess, Mandi Tax etc.)
Further, the industry pointed out that the existing Research & Development Cess (R&D Cess) payable on the import of technical knowhow is a cost to businesses. In the existing Service Tax regime, the Service Tax payable on payment of royalties / technical knowhow is reduced to the extent of R&D Cess paid. However, no credit of the R&D Cess is available to the businesses.
The R&D Cess, being a central levy should be subsumed in the Central GST. This will simplify the overall tax regime and compliances. Further, for agriculture purchases, a Mandi Tax is levied in many of the states. This also needs to be subsumed in the state GST.
Besides, the industry also pointed out general issues for consideration.
The Revenue Neutral Rate needs to be kept low to spur growth, contain the inflationary pressure, achieve higher compliance and contribute to the prime minister’s mission of “Make in India.”
All the states need to go live at the same time to avoid operational issues for the industries.
The design and structure of the proposed GST has undergone significant change since the time the First Discussion paper on GST was released by the Empowered Committee (EC) of the State Finance Ministers (November 2009). A directional clarity is urgently required for businesses to gear up to be GST ready on April 1, 2016. It is critical to note that businesses need 6-9 months to configure their IT systems, testing them for compliance and impart training to the users.
There is a need to release the second discussion paper on GST jointly by the Central government and the EC covering all the above failing which, despite best intentions, execution of GST could create significant business disruption, according to the industry.